Dollar Posts Largest Weekly Gain in a Month, Supported by Middle East Tensions and Tariffs

The U.S. dollar edged higher on Friday (24th), posting its strongest weekly performance in over a month, supported by safe-haven demand as Middle East hostilities expanded and market expectations that the Federal Reserve (Fed) may raise interest rates to combat inflationary pressures driven by rising oil prices.

In New York trading, the dollar index (DXY), which tracks the greenback against six major currencies, rose to 101.49, gaining 0.7% for the week—the best weekly performance since June 19.

The dollar strengthened this week, primarily due to inflation concerns sparked by surging oil prices and renewed trade tensions following Washington’s imposition of new tariffs.

Brent crude futures surged past $100 per barrel on Thursday for the first time since May, with prices on track to rise over 25% in two weeks.

The oil price rally followed an announcement by Iran-backed Yemeni Houthi militants that they had attacked a Saudi oil tanker in the Red Sea.

In addition to the Strait of Hormuz, the Houthis also threaten shipping through the Bab el-Mandeb Strait. With both critical waterways at risk, market concerns over potential oil supply disruptions have intensified.

There are few signs of de-escalation between the U.S. and Iran. On Thursday, U.S. Central Command confirmed it had conducted attacks on Iranian forces for the 13th consecutive night. Tehran responded with attacks on U.S. military bases, primarily in Bahrain, Kuwait, and Jordan.

Diplomatic mediation efforts also appear to be faltering. The New York Times, citing Iranian and Iraqi officials, reported that Iran has rejected a ceasefire proposal backed by the U.S. and delivered by Iraqi Prime Minister Ali al-Zaidi.

Moreover, rising trade tensions have further fueled inflation concerns. President Trump this week imposed new double-digit tariffs on imports from 60 of America’s major trading partners.

Market Focus Shifts to the Fed

Inflation concerns spiked this week, most clearly reflected in surging U.S. Treasury yields as traders dumped bonds.

The 10-year Treasury yield rose 14 basis points this week, while the more rate-sensitive 2-year yield climbed over 16 basis points.

Market expectations for a Fed rate hike have also increased. According to the CME FedWatch tool, markets now assign about a 62% probability to the Fed holding rates steady at its upcoming policy meeting, down from around 87% a week ago.

Meanwhile, the probability of a 25-basis-point rate hike has risen from about 13% a week earlier to nearly 38%.

Yen Hovers Near 40-Year Lows, Pound Weakens

Elsewhere, the Japanese yen was little changed against the dollar at 163.84, marking its worst weekly performance since mid-May.

The dollar-yen pair rose about 0.9% this week.

Japanese Finance Minister Satsuki Katayama reiterated on Friday that authorities remain ready to intervene in the foreign exchange market, but her comments did little to support the yen, highlighting investor skepticism about the effectiveness of verbal intervention alone.

In Europe, the British pound fell 1% for the week, its weakest performance since mid-June.

The UK’s seventh new prime minister in 10 years reaffirmed adherence to the fiscal rules of his predecessor, reigniting market concerns over the country’s fiscal health.

The euro fell 0.6% against the dollar this week. A day earlier, the European Central Bank (ECB) held rates steady as widely expected but signaled that a rate hike in September is almost certain.

In addition to the Fed, the Bank of Japan (BoJ) and the Bank of England (BoE) will also announce rate decisions next week, setting the stage for a series of major central bank policy meetings.

As of approximately 6:10 a.m. Taiwan time on Saturday (25th):

The dollar index stood at 101.4647, up 0.0175%.

EUR/USD traded at 1.1370, down 0.0615%.

GBP/USD was at 1.3323, up 0.0676%.

AUD/USD was at 0.6983, up 0.2153%.

USD/CAD was at 1.4093, up 0.0639%.

USD/JPY was at 163.8500, down 0.0061%.